A CASE STUDY of the ZIMBABWE STOCK EXCHANGE a Thes

THE ADEQUACY OF CORPORATE MANDATORY DISCLOSURE PRACTICES ON EMERGING MARKETS: A CASE STUDY OF THE ZIMBABWE STOCK EXCHANGE A thesis submitted in fulfilment of the requirements for a degree of Doctor of Philosophy by Stephen Owusu-Ansah M.Sc. (York), B.Sc. Admin. (Legon) to the School of Accounting & Finance Middlesex University Business School Middlesex University London England March, 1998 Re*"4414 dedicated to met u4e, 44a, ftanaltd., 4ataer4 awl adreAd , 11 DECLARATION This thesis is submitted to the Middlesex University in fulfilment of the requirements for the award of the degree of Doctor of Philosophy in Accounting. The thesis is available for use in libraries on condition that anyone who consults it is understood to accept that its copyright rests with me and that no quotation taken from it nor any information derived from it may be published without my written consent. I declare that the thesis is my own work and that it, or any part of it, has not previously been submitted to any university for an award of a degree, nor is it, or any part of it, concurrently being submitted either in candidature for any degree or for publication which would be copyrighted in the United Kingdom or elsewhere. I also declare that materials included in this thesis that are not my work have duly been acknowledged and referenced in the text, footnotes and bibliography. The usual disclaimer applies; that is, the analysis, opinions, policy recommendations, and factual errors herein are not necessarily those of the individuals and institutions whose works I consulted in the conduct of the investigation, but mine. Signed: Stephen Owusu-Ansah March, 1998. TABLE OF CONTENTS Page ABSTRACT 1 PREFACE 3 ACKNOWLEDGEMENTS 7 LIST OF ABBREVIATIONS 11 LIST OF TABLE 13 LIST OF FIGURES 15 PART A GENERAL BACKGROUND TO THE STUDY CHAPTER I INTRODUCTION AND BACKGROUND TO THE STUDY 17 The Aims of the Study 17 Statement of the Problem 18 Review of the Relevant Literature 21 The Scope of the Study 35 Summary 37 CHAPTER II THE MICROSTRUCTURE OF THE ZIMBABWE STOCK EXCHANGE 38 The Historical Development of the Stock Exchange 38 Organisation of the Stock Exchange 39 The Stock Market's Trading Mechanisms 42 Trading, Settlement and Delivery Systems. 42 Brokerage Commissions and other Transaction Costs 44 The Structure of the Stock Exchange 45 Market Size 45 Foreign Portfolio Investment 49 The Performance of the Stock Exchange 51 The Market Index 51 Method of Computation of the Indexes 51 Frequency of Computation of the Indexes 53 Assessing the Performance of the Market 54 The Regulation of the Stock Exchange 56 Listing Requirements 57 Information Disclosure Requirements 60 The Stock Exchange Annual Reporting Rules 61 Investor/Shareholder Protection Code 61 iv Insider Trading 63 Summary 64 CHAPTER DI THE REGULATORY FRAMEWORK FOR FINANCIAL ACCOUNTING AND REPORTING IN ZIMBABWE 65 The Legislative Framework 65 The Companies Act 66 The Institutional Framework 70 The Accountancy Profession in Zimbabwe 70 Accounting and Auditing Standards in Zimbabwe 76 Accounting Standards 76 The Authority of International Accounting Standards Committee in Zimbabwe 81 The Scope of International Accounting Standards in Zimbabwe 82 Auditing Standards 82 Taxation 84 Monitoring and Enforcement of Mandatory Disclosure Requirements 85 The Review Process and Its Object 86 Summary 88 PART B THEORETICAL FRAMEWORK CHAPTER IV THE THEORETICAL FRAMEWORK FOR CORPORATE DISCLOSURE 90 Free Market Theory 91 Market for Managerial Skills 94 Market for Corporate Control 96 Market for Securities Control 100 Efficient Market Hypothesis 102 Regulatory Theories 108 Public Interest Theory 109 Existence of Inadequate Incentives to Disclose Information 110 Market Failure and Financial Reporting 110 Financial Reporting and Public Goods 111 Financial Reporting Externalities 113 Unequal Possession of Information 116 Suppression of Unfavourable Information by Management 118 Interest Group or "Capture" Theory 122 Implications of Corporate Disclosure Regulation for Securities Markets .125 Protection of Investors 126 Promotion of Fair Dealing 129 Provision of Valuable Information for Investment Purposes 132 Improved Efficiency of Resource Allocation 134 Preservation of Confidence in Capital Markets 138 Summary 139 CHAPTER V THE THEORETICAL FRAMEWORK FOR REGULATORY ENFORCEMENT 140 Regulatory Enforcement Theories 140 Deterrence Model 141 Co-operative Model 142 The Evolutionary Game Theory Model 143 Regulatory Framework of Emerging Stock Markets 144 The US Model 144 The British Model 145 The New Emerging Model 145 Summary 146 PART C RESEARCH DESIGN AND MEASUREMENT CHAPTER VI MEASURING DISCLOSURE: RESEARCH METHODOLOGY. .148 Types of Mandatory Disclosure System 149 Contextual Definition of Disclosure 152 Conceptual Definition of Adequate Disclosure 154 Operational Definition of Adequate Disclosure 160 Measuring Adequate Mandatory Disclosure 161 Perceived Disclosure-Deficiency Approach 161 Frequency Distribution Approach 163 The Content Approach 163 The Index Approach 164 Summary 167 CHAPTER VII DEVELOPMENT AND FORMULATION OF TESTABLE HYPOTHESES 168 Testable Hypotheses 169 Hypothesis 1: "Stringency" of Disclosure Regulatory Regime 169 Hypothesis 2: Company Size and Mandatory Disclosure 172 Hypothesis 3: Quality of External Audit and Mandatory Disclosure . 175 Hypothesis 4: Ownership Structure and Mandatory Disclosure 177 Hypothesis 5: Industry-Type and Mandatory Disclosure 180 Hypothesis 6: Company Age and Mandatory Disclosure 182 Hypothesis 7: Multinational Corporation Affiliation and Mandatory Disclosure 183 Hypothesis 8: Profitability and Mandatory Disclosure 185 Hypothesis 9: Liquidity and Mandatory Disclosure 186 Summary 187 CHAPTER VEI DATA COLLECTION AND SAMPLING METHODS 188 Selection of Target Population 188 vi Sample Design and the Sample 190 Summary 193 CHAPTER a MANDATORY DISCLOSURE INDEX 194 Selecting Mandated Disclosure Items 194 The Quality of the Disclosure Measuring Instrument 196 Testing the Validity of the Measuring Instrument 196 Testing the Reliability of the Measuring Instrument 201 The Scoring Procedure 206 Description of the Disclosure Index 216 Summary 219 CHAPTER X OPERATIONAL DEFINITIONS AND MEASUREMENT OF VARIABLES 221 Operational Definitions and Measures of Variables 223 Operational Definition of "Stringency" for Hypothesis 1 223 Measure of Company Size for Hypothesis 2 225 Measure of Quality of External Audit for Hypothesis 3 231 Measure of Ownership Structure for Hypothesis 4 233 Measure of Industry for Hypothesis 5 234 Measure of Company Age for Hypothesis 6 236 Measure of Multinational Corporation Affiliation for Hypothesis 7 237 Measure of Profitability for Hypothesis 8 239 Measure of Liquidity for Hypothesis 9 239 Summary 241 PART D DATA ANALYSIS AND INTERPRETATION CHAPTER XI UNIVARIATE STATISTICAL ANALYSIS AND RESULTS 243 Statistical Tests Relating to the Major Hypotheses 243 Results of Statistical Tests and Interpretation 246 "Adequacy" of Mandatory Disclosure Practices 246 "Stringency" of Disclosure Regulatory Regime (Hypothesis 1) 251 Relationships Between Corporate Attributes and Mandatory Disclosure 254 Company Size and Mandatory Disclosure (Hypothesis 2) 254 Audit Quality and Mandatory Disclosure (Hypothesis 3) 255 Ownership Structure and Mandatory Disclosure (Hypothesis 4) 257 Industry-Type and Mandatory Disclosure (Hypothesis 5) 258 Company Age and Mandatory Disclosure (Hypothesis 6) 260 Multinational Corporation Affiliation and Mandatory Disclosure (Hypothesis 7) 261 Profitability and Mandatory Disclosure (Hypothesis 8) 262 Liquidity and Mandatory Disclosure (Hypothesis 9) 263 vii Summary 265 CHAPTER XII MULTIVARIATE STATISTICAL ANALYSIS: DISCLOSURE EXPLANATORY MODEL 266 Specification of the Disclosure Explanatory Model 267 Estimating the Parameters of the Model 270 Model A 272 Model B 272 Model C 274 Model D 276 Model E 278 Model F 279 Assessing the Robustness of Model F 284 Economic a priori Criterion 284 Statistical Criterion 286 Econometric Criterion 287 The Assumption of Collinearity 287 The Assumption of Mean of Zero 291 The Assumption of Normal Distribution 292 Summary 292 CHAPTER XIII CONCLUSIONS, LIMITATIONS AND SUGGESTIONS FOR FURTHER RESERACH 294 Conclusions and Policy Implications 294 Limitations and Suggestions for Further Research 298 Summary 303 PART E APPENDIXES AND B1BLOGRAPHY APPENDIX A Summary of Studies on Corporate Annual Disclosure Practices 305 APPENDIX B Corporate Mandatory Annual Disclosure Measuring Instrument 308 APPENDIX C Mandatory Disclosure Scores of the Sample Companies 321 APPENDIX D Scatter Plots of Company Size, Company Age, Ownership Structure and Profitability, and Mandatory Disclosure 323 BIBLIOGRAPHY 325 viii ABSTRACT This research study is descriptive, normative and empirical in scope. The main purpose of the study, reported in this thesis, is to empirically investigate the "adequacy" of mandatory information disclosure practices of public companies listed on an anglophone African stock exchange classified as an emerging equity stock market by the International Finance Corporation (IFC), and to assess the "stringency" of the disclosure regulatory regime of that market. The study also investigates the characteristics of the relationship between some selected corporate attributes and mandatory disclosure. The corporate attributes examined are: company size, audit quality, ownership structure of equity shares, industry-type, company age, multinational corporation affiliation, profitability, and liquidity. A sample of 49 non-financial companies

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